Any proposed quality improvement initiative can be translated into a defensible business case. However, as presented in the first article in this series (May/June PLJ), the common challenge and limitation are reasonably projecting the financial impact. Linking quality improvement with the anticipated financial impact is the key to making an effective business case. Financial impact can be categorized into three specific types, presented in Table 1.
The three types of financial impact and relevant applications of each are presented here as a guide for monetizing quality toward making an effective business case.
Type 1: Direct Impact (Decrease Expense)
The easiest category of financial impact to measure is Type 1. A Type 1 financial impact has a direct effect of reducing operating expense by cutting the acquisition cost of a supply or service, decreasing the amount of the supply or service used, or some combination of both. It’s important to note that an actual cost reduction can be achieved only when the financial impact from the initiative affects a cost center reflected on the business enterprise’s financial statement, such as the monthly income statement or profit and loss statement.
For example, hospital leaders want to assess the impact of implementing a hip implant demand matching program. Demand matching is a provider-driven process to determine the most appropriate implant for the specific needs of each patient using an objective clinical algorithm. The total cost of waste is calculated by subtracting the cost of the appropriate low-demand hip from the cost of the unnecessary high-demand hip.
Assuming a 15% reduction in 400 total high-demand hips per year and a $5,000 difference between the cost of a high-demand implant and the cost of a low-demand implant, the 60 fewer high-demand hips from the demand matching program results in $300,000 annual savings. In this example, the total projected financial impact from the demand matching initiative is the same as the current cost of waste, assuming there are no incremental costs required to achieve the planned savings.
Type 2: Indirect Impact (Decrease Expense)
A Type 2 indirect financial impact results from improving throughput cycle time. The cost savings typically occur from extracting unnecessary labor and non-labor expenses from an inefficient process. Like Type 1, a Type 2 financial impact is not achieved until it can be allocated to a specific cost center reflected in a financial statement.
For example, a business enterprise identifies an opportunity to improve “top of license” activities for radiologic technologists by using less-expensive transporters to escort patients to and from the emergency department. Collecting some basic historical data, combined with conducting a patient flow map, can determine the cycle or throughput time.
In this organization, radiologic technologists spend 1,500 hours a year transporting patients. The average hourly rate for a radiologic technologist (including all benefits) is $45. Alternatively, a patient transporter could be paid $15 per hour to do the same work. If this opportunity was implemented, the potential annual cost savings using transporters instead of technologists would be $45,000.
When considering staffing needs, it’s important to note that choosing not to fill an open employee position is not an actual cost savings; rather, it is cost avoidance. A cost avoidance does not have a measurable financial impact on the bottom line unless the position is permanently eliminated. Again, any incremental cost savings must have a measurable impact on the business enterprise’s bottom line.
For example, reducing patient length of stay has a financial impact only if the extra staff time gained through cutting patient days is reduced by closing a nursing unit or flexing-off employees. (Monetizing a reduced length of stay is addressed later in this article.)
Finally, successfully implementing an initiative with a Type 2 financial impact has two potential benefits: achieving measurable cost savings from increasing efficiency and creating the potential for additional capacity to grow profitable volume and market share.
Type 3: Indirect Impact (Increase Revenue)
In general, leaders should continuously explore incremental volume and market growth opportunities, especially after creating capacity. A Type 3 financial impact results when the business enterprise leverages the additional growth capacity achieved from a Type 2 initiative — the financial impact for which is recognized only when the additional volume and market share results in incremental revenue are recorded on a financial statement.
Going back to the transporter–technologist top of license Type 2 financial impact example, assume that due to scheduling challenges, the business enterprise can’t eliminate the technologist hours to realize the projected $45,000 savings. By trading technologists for transporters, however, the organization creates additional technologist capacity that it can fill with more value-added activity.
Leaders then identify and evaluate options to best leverage and “bank” the additional capacity. In other words, they determine how the freed-up technologist hours can be used to generate additional revenue.
For example, the impact of patients who cancel at the last minute or do not show up for their scheduled appointment creates a double hit to the bottom line: the expense incurred with the decreased labor productivity and the lost revenue from the absent patient. Assuming a 15% no-show rate in the outpatient radiology department with 20,000 scheduled appointments per year averaging $500 net revenue per visit, the total annual lost opportunity (cost of waste) is $1.5 million.
Using a simple script with some additional training, the technologists now have the capacity to call patients to remind them of their appointment and answer any questions. Using “live” staff rather than an automated appointment reminder system to call and remind patients of upcoming appointments can significantly decrease the no-show rate and improve patient engagement and satisfaction. Each of these factors has been shown to improve financial outcomes.
The anticipated annual savings is $750,000, assuming the initiative was successful in translating the additional workload capacity from the saved radiologic technologist time to reduce patient no-shows by half in the first six months. Additional examples of how to identify and categorize the financial impact of common quality improvement initiatives are presented in Table 2.
Example of Type 2/3 Indirect Impact: Reducing Average LOS
To illustrate an application of monetizing quality by reducing average length of stay (ALOS), a common challenge in many hospitals, the leading indicators are improving clinical outcomes, patient safety, and the patient experience. The lagging financial indicators are reducing unnecessary expenses and increasing volume and revenue from the added capacity.
The steps for calculating the potential financial impact are:
Identify the risk-adjusted baseline by MS-DRG, service, and physician.
Quantify the cost per bed day by type of bed (e.g., ICU, med surg, observation).
Compare data to an external benchmark or internal target.
Assume the current risk-adjusted ALOS for MS-DRG 470 (total joint replacement) is 4.0 days for 1,000 annual discharges. The proposed target of 3.5 days, a reduction of 0.5 days, would result in 500 fewer patient or bed days per year. The estimated cost per bed day is $2,000, including all direct and indirect expenses.
Using the traditional calculation method of multiplying the projected reduced days by the average cost per day, the annual cost savings is $1 million. However, the average-cost approach significantly overstates the true financial impact, potentially creating an unrealistic expectation. The average cost per bed day is $2,000; however, the four-day length of stay is weighted more at the beginning due to the intake intensity and required staffing resources, as shown in Figure 1.
Figure 1. Cost per Day (MS-DRG 470)
The total cost for day 4, the final day of the stay, is only $750. Therefore, eliminating a half day from the final day equates to a potential $187,500 savings. In this example, using an average distorts the actual impact that reducing length of stay has on the bottom line by more than five times.
Example of Type 2/3 Indirect Impact: Reducing Incidents of LWOBS in the ED
The capacity created from the Type 2 impact can generate additional revenue as a Type 3 financial impact. For example, ED capacity in the United States has become increasingly strained as more patients requiring urgent and non-urgent attention seek care and the around-the-clock convenience of the emergency department. Potential lengthy delays in being seen in the ED, typically due to bottlenecks in admitting patients to beds, cause some patients to leave without being seen (LWOBS) by a physician. Notwithstanding the risk of avoiding or delaying potentially life-saving treatment and the significantly increased risk of infections, falls, and other adverse events a longer stay in the ED can create, there can also be a significant financial impact.
The Type 3 financial impact (lost revenue) can be calculated by multiplying the LWOBS rate by the total ED visits plus the percent of expected admissions, factoring in the relatively lower acuity of patients who leave the ED untreated. For example, assuming a 2% LWOBS rate for 50,000 annual ED visits, of which 10% are admitted to the hospital, the projected lost volume is 1,000 visits and 100 admissions. Given the expected net revenue of $500 for an ED visit and $5,000 for an inpatient admission, the combined lost annual revenue is $1 million.
Investing in additional ED triage capacity, perhaps through optimizing internal laboratory and radiology turnaround times and efficiency, can improve outcomes, access, and patient experience, and provide a positive return on investment.
Conclusion
Surviving in the current and anticipated healthcare operating environment requires leaders to consistently demonstrate comparatively higher quality at the lowest possible cost to payers and patients alike. To accomplish this, leaders must take a deliberate and systematic approach to identifying, measuring, and reporting both the cost of waste and the anticipated financial impact of quality improvement initiatives. When a proposed quality initiative is monetized as an additional call-to-action, leaders can more strategically prioritize increasingly scarce resources to accomplish their mission.
The third article of the four-part series will examine the benefits of linking quality and cost by creating an integrated performance measurement scorecard.
Go to https://www.physicianleaders.org/mbcqcalc for Excel spreadsheet calculations of the financial impact examples provided in the article.